Fwd: Benefits of Investing in Small cap stocks

 

Benefits of Investing in Small cap stocks.

ü Huge growth potential in short to medium term due to growing economy and freeing up of markets and reforms.

ü Potential to become big-caps or large companies after years.

ü Potential benefit by corporate actions such as mergers, acquisitions, demergers, bonus shares, issue of more shares through rights issue, follow on offer, value unlocking,, back-ward integration, forward integration, raising of equity capital, such other events resulting into expansion of equity capital as well focusing attention of market participants.

ü One of the biggest advantages of investing in small-cap stocks is the opportunity to beat institutional investors. Because mutual funds have restrictions that limit them from buying large portions of any one issuer's outstanding shares, most mutual funds would not be able to give the small cap a meaningful position in the fund, so such stocks remain under-invested, under-researched in secondary market.

ü Small cap stocks can increase your portfolio return by many percentage points because they can rise more compared to other 'caps' and even in multiple times.

ü These companies are less well researched and that is why could be more likely undervalued. Because of this also such companies can become market's favorite when it is 'discovered' or joins 'mid cap' league. This under-researched and under-followed characteristics benefits investor by the way that they are more likely to spot something that others have missed.

ü It is easier to double a sale of 5 cr into 10 cr for a small cap company than say Reliance Industries or take any large cap or may be Sensex Company.

ü Due to smaller equity capital base, any spurt in earnings brings spurt in sharp spurt in EPS and consecutively the current PE declines and the stock price rises to adjust the earnings.

ü Generally Small cap stocks are undervalued than large cap stocks for some reasons indicated above and other reasons. Just try to compare PEs of Reliance Industries Ltd. and few Sensex companies with some Small cap stocks.

ü It is observed that young companies generate fastest wealth, as they record highest earnings growth on a low base.

ü Finding Your L & T and Reliance:

It is highly less likely that any investor would be able to make enormous wealth, if so then comparable to those who made it by investing into Reliance or L and t of the sorts before years. Because this companies are large caps and already usually running on several times PE. In one sense they have already grown. They are there from decades. Yes, they will continue to create value for their share holders. But they have lost the capacity to give similar returns to investors investing afresh than those investors who invested years ago at when it was growing.

ü If you are finding for next Big thing, Obviously you've got to look at Small!

ü According to Motilal Oswal Wealth Studies,

74 of the top 100 wealth creating companies in 2009 had a base market capitalization of less than Rs.5000 crore in 2004.

ü According to Capitaline and RCAM Estimates,

Out of 100 Large cap companies in 2009, 46 companies are such which migrated from Small cap and Mid cap space in the last 5 years.